How would a dollar devaluation affect assets?

A devaluation of the US dollar would have an impact on the movements of other asset classes. Currency volatility is one of the lowest on record, with central banks necessarily supporting markets, helping to dampen volatility.

However, when interest rates become so low that they cannot be lowered any further - like right now - and the relative interest rates between countries can no longer be changed, currency volatility must necessarily increase.

The inability to lower interest rates is true in all developed markets and is largely the most important factor in today's markets.

In Japan, rates are zero or negative across most of the curve. The same is true in Germany, Switzerland, France and other developed EU markets. The United States has been in the same boat since last March.

In other words, when interest rates are used to inject more money and credit into the economy, currencies are subject to downward pressure. Otherwise, these movements will result in economic volatility, which is less desirable.

For example, nine years ago, Greece was pegged to the euro during the debt crisis. As a result, it has not been able to conduct an independent monetary policy. It therefore had to take the devaluation internally, through a drop in production and income.

If it had been on the drachma, which was officially phased out 19 years ago (and pegged to the euro during the transition period beginning in June 2000), it could have better managed its debt problems by lowering interest rates, by extending maturities and devaluing its currency.

Due to the United States' balance of payments deficits (i.e. current account deficit, budget deficit) and the swelling ratio of net foreign debt to GDP (around 44%), the dollar will have to depreciate over time.

A weaker currency allows debt relief - foreign borrowers are repaid in less valuable money - and helps make exported products more internationally competitive. A cheaper currency (lower relative exchange rates) is in effect giving a discount to foreign buyers while keeping the wages of domestic workers constant.

It is in fact a devaluation compared to the rest of the world.

In the United States, monetary policy is the responsibility of the Treasury Department. During the great Trump administration, the United States did not explicitly express its desire to see the USD run its course.

However, the Treasury probably lacks the resources to exert a significant effect on the dolar and has not acted by intervening.

But more generally, when interest rates and the fixed income channel for the conduct of monetary policy are exhausted - that is, rates are zero or negative and yields further down the curve are zero or negative - then the "currency wars" are likely to become more important. Governments are under increased pressure to depreciate their currencies.

Fixed exchange rate systems are subject to increased downside or modification pressure when they are inconsistent with underlying macroeconomic fundamentals.

Currency risk is heightened for traders, who currently perceive currency risk to be at an all-time low.

Moreover, since exchange rate depreciations do not provide real net added value at the global level, changes in exchange rates will not lead to the overall easing that will help improve living standards globally. (Although it can help, in net terms, at the individual country level if they can reduce exchange rates in relative terms, especially against major trading partners).

When exchange rates move, it benefits one country at the expense of another. There are also distribution effects.

If you are a net borrower, a weaker local currency is generally helpful because you are paying back in a depreciated currency. If you are a net creditor, a weaker currency is a downside, because the asset you held (someone else's debt) is no longer worth as much in terms of purchasing power.

A devaluation of the currency is also the most discreet way to provide needed easing. People don't notice it, or even appreciate the effects, like increasing their assets. It is therefore also a politically acceptable solution.